The gold standard?
Most people have heard of the gold standard; but if you haven’t, it was a simple concept with the purpose of preserving the purchasing power of currency over time. From 1944-1971, every US Dollar in circulation had to be matched with a proportionate amount of gold in the US vault at Fort Knox in Tennessee. The gold standard was also the basis for the international monetary system from the 1870s until 1932. But why did we abandon it? Well, a variety of factors. Mainly, problems with volatility in exchange rates and constraints on governments’ ability to set up monetary policies. Simply put, there is only so much gold in the world, and as populations and economies grew, there wasn’t enough to go around. For every new dollar that needed to be circulated, there was a lot less gold, which would have made the dollar skyrocket in value; this would have caused the American consumer to see massive deflation in prices, with not enough paper money to go around.
Now that we’ve established why the gold standard was abandoned, what has happened since? For starters, gold and the US Dollar have a floating exchange rate. Traded on the Commodities Exchange, or Comex, the price of gold fluctuates daily, but has risen significantly over time. Although they have performed an investment as stocks over the long run, investors have been rewarded handsomely at times for their ownership of gold. Gold hit an all-time high of $5,354 per ounce in January of this year, followed by an approximate 26.5% decline; the precious metal is down 9.6% this year.The gold frenzy earlier this year surprised a lot of people, but as all price bubbles are, it was impossible to predict when it would pop.
So now that we know that there is a lot of speculation and trading in gold, what does that actually mean for everyday people, rather than jewelers, commodities traders, or bankers? Most financial advisors will have you keep 5% of your investment portfolio in cash or cash equivalents; some advisors will allocate 5% to gold as well. There are many ways to do this, many of which have risen in popularity; one is an ETF with the ticker symbol $GLD, which tracks the price of physical gold bars (bullion) in USD. Some people will hold the bullion on their own, for better or worse, and others will dabble in gold futures contracts. To each their own.
But what has been driving the gold market as of late? Lots of funds and governments have been loading up on gold, but the price has consistently fallen after reaching its January peak. But what accounted for the price falling so much? It’s entirely possible that the aforementioned large holders were forced to sell their positions to raise cash for other investments and short-term needs. With rising geopolitical tensions, a lot of money has been withdrawn from gold, probably to protect against the volatility we’ve seen in markets this year. Although China has been buying gold in bulk, there are no guarantees that the price will return to its January peak anytime soon.
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